Recent Trends and Price-Cost Margins in Japan’s Iron and Steel Industry

Atsuko Matsuoka Research Assistant Professor, ICSEAD

Working Paper Series Vol. 2002-32 Revised, March 7, 2003

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The International Centre for the Study of East Asian Development, Kitakyushu

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Recent Trends and Price-Cost Margins in Japan’s Iron and Steel Industry

Atsuko Matsuoka, Research Assistant Professor

The International Centre for the Study of East Asian Development (ICSEAD),

Kitakyushu.

Revised, March 7, 2003

Abstract

This paper investigates the sources of profitability changes in Japan’s iron and steel

industry during 1980-1999 by decomposing the price-cost margin into value added factor,

intermediate materials factor, and labor factor.

The first major finding is that price-cost margins in Japan’s iron and steel industry in the

1980s increased mainly due to the positive contribution of value added, and it decreased in the 1990s

mainly due to its negative contribution. It also should be noted that this negative effect was larger

with the five major steel makers (Nippon Steel, NKK, Kawasaki Steel, Sumitomo Metal Industries,

and Kobe Steel), which was accompanied with a decline of their value added share in Japan’s iron

and steel industry. The second, when the growth rate of total sales were decomposed into price and

quantity factors in both domestic and export markets, the decrease of the domestic price factor

turned out the major cause to reduce total sales in the 1990s. The decrease of export price factor

also reduced total sales, whereas export quantity factor had effects to increase total sales. However,

those export factors were very small compared with the negative domestic price factor.

Considering those findings and the fall of domestic steel prices in the 1990s, Japan’s iron and steel

industry might have less market power with more competitive product markets than expected.

Contents

1. Introduction

2. Overview of Japan’s Iron and Steel Industry

3. The Data

4. Price-cost Margin in Japan’s Iron and Steel Industry

5. Price-cost Margin in Japan’s Iron and Steel Sub-industry

6. Conclusion

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1. Introduction Since archiving the peak level of 119 million ton in 1973, the production of crude steel in Japan has kept the level of nearly 100 million. However, the share of Japan’s iron and steel industry to the total value added or labor force declined. Its share of the total exports also declined after the two times of the oil shocks. Therefore, in 1970’s, Japan’s iron and steel industry switched from the scale enlargement policy after the war to a production structure with energy-saving and input-saving technological innovations.1 And since the yen appreciation following to the Plaza Agreement in 1985, and especially in the Heisei recession after the economic boom of the Bubble Economy broke, Japan’s iron and steel industry has been making efforts to prevent reduction in profitability and to improve production efficiency through employee reductions and disposals of excessive facilities and equipments. As a result, Japan’s iron and steel industry has coped with the change of the economic surroundings through changing its production structure. Turning to the market structure, an iron and steel industry is regarded as an oligopolistic market of products, because it is a process industry with large fixed costs. And there was an evidence to show that the product market of Japan’s iron and steel industry was imperfect competition, as reflected in estimates of markup rate, namely, the ratio of price over marginal cost, by Nishumura, Ohkusa, and Ariga (1999) from 1971 to 1994 and Shirai (2000) from 1962 to 1984. However, Japan’s iron and steel industry recently has been confronted by difficulties of sharp declines of steel prices since the burst of the Bubble Economy, and the decline of steel prices was relatively larger than the overall deflation of the Japanese economy during the Heisei Recession. This tendency is reflected partly in the growing competition between major domestic steel makers with blast furnaces and smaller domestic makers without blast furnaces, and furthermore, in the competition among major domestic steel makers themselves. Therefore, in recent years, there is a possibility that Japan’s iron and steel industry has been losing its market power in product markets because of an increasing domestic competition. In past two decades, Japan’s iron and steel industry has been making efforts to prevent reduced profitability through improvement of production efficiency by adjustments of production structure, such as energy-saving and input-saving technological innovations and employee reductions. On the other hand, recent declining prices of steel products reduce profitability. When profitability is measured

1 Technological progress and substitution of energies were the one of the major topics at that time, for instance, in Kitasaka (1992).

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with the price-cost margin (defined as profit rate per cost in monetary basis), changes of production structure and market structure could affect this price-cost margin. For instance, a restructuring of production process raises price-cost margin through a reduction of variable costs, whereas a fall in prices decreases it. 2

Thus, the purpose of this paper is to investigate the sources of profitability changes in Japan’s iron and steel industry, by decomposing price-cost margin into value added factor, intermediate materials factor, and labor factor from 1981 to 1999. Rather than investigating price-setting strategies of steel makers, we examine recent trends of price-cost margin and the effect of overall market power changes and cost structural changes in Japan’s iron and steel industry. The remainder of this paper is organized as follows. Section 2 overviews the recent trends of Japan’s iron and steel industry, and especially focuses on the recent decline of steel prices. Section 3 describes the data used. Section 4 investigates price-cost margin in Japan’s iron and steel industry with aggregated industrial classification, and its decomposition. Using the same methodology in section 4, section 5 investigates them in Japan’s iron and steel sub-industries with more disaggregated industrial classification. Finally, some concluding remarks are offered in Section 6. 2. Overview of Japan’s Iron and Steel Industry Recent Trends

Table 1 indicates recent trends for Japan’s iron and steel industry. As the economic boom (the Bubble economy) since the late 1980s ended in the early 1990s and Japan’s economy plunged into Heisei Recession, all indices of gross output, value added and employment in Japan’s steel industry decreased from the early 1990s to 2000. The shares of steel industry for value added and labor force also decreased during this period. On the other hand, labor productivity (measured by value added per employee) and compensation per employee increased, reflecting the 35 percent employment reduction from the beginning to the end of the 1990s. Rising wage rate and an reduced employment resulted in slightly increased share of wages and salaries to value added. The share of operating surplus to value added decreased as far as both shares of wages and salaries and depreciation increased. Concerning the trade of steel, exports

2 Odagiri and Yamashita (1987) analyzed the determinants of markup rate (measured by price over average variable cost) in Japan’s manufacturing industries, mainly focusing on the relationship between business cycle and markup rate. In other words, Odagiri and Yamashita (1987) concerned the effect of market structure on the price-cost margin.

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increased in the late 1990s and 2000, compared with the low levels in the economic boom of the early 1990s, and then has been stable. Japan’s imports of steel have been very small, about 20 to 30 percent of its exports.

Table 2 shows the value of Japan’s exports by commodity and destination. Exports of all steel (SITC 67) mainly went to Asian countries (China, Korea, and Taiwan), and their amount increased by 2000. Exports to the United Sates was the second largest, however, the amount tend to decrease in 2000. Among steel products, universals, plats, sheets (SITC 674) accounted for roughly 60 percent of the all steel exports, with large part of it going to Asia (more than 80 percent, except in 1998 after the Asian crisis). The export share of tubes, pipes, fittings (SITC 678) to all steel products was the second largest, however, its share to the all steel exports declined 26 percent from 1990 to 1992 to 14 percent in 2000. And the export share of pig iron and other primary steels (SITC 671 and 672) to the all steel products were very low.

The value of Japan’s imports is shown in Table 3. Japan’s import of all steel (SITC 67) was mainly from Asian countries, especially from Korea. And import share from Asian countries increased from 58 percent in 1990-1992 to 72 percent in 2002, mainly due to the increase of imports from China. By commodity, universals, plates, sheets (SITC 674) accounted for almost half of all imports, mainly from Korea. The imports of pig iron, sponge iron, etc. (SITC 671) account for almost 30 percent of all imports, and Japan increased its import from China during the periods, whereas imports from Europe decreased.

<<< Insert Table 1,2,3 >>> A Fall in the Steel Prices Since the end of the economic boom in the late 1980s, the Japanese economy turned into a recession, and it has been experiencing price deflation, as overall wholesale price index for all commodities declined (as shown in Figure 1). Overall wholesale price index for steel products increased higher than for all commodities during the economic boom, but it decreased rapidly during the 1990s by 20 percent. A sharp decline of steel prices in the 1990s is partly due to an increase of imports, especially during the economic boom. However, they slightly decreased in the late 1990s (Table 3). Thus, there may be other reasons to explain the fall in steel prices in the 1990s.

<<< Insert Figure 1 >>> The fall in the price of steel products in the 1990s may have been caused partly

by a severe competition among domestic steel makers. Figure 2 indicates shares of

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sales, value added, and variable costs (the sum of intermediate materials and compensation of employees) for the five major integrated steel makers3 to the total of Japan’s iron and steel industry during 1986 to 1999.4 The share of sales for the five major steel makers has been stable from 40 to 50 percent during the period, and similar trend is observed for the share of variable costs. However, the share of value added for the five major steel makers declined from 54 percent in 1986 to 35 percent in 1999. This indicates the decreasing market power for the five major steel makers, which may be one of the causes of falling prices in steel products.

<<< Insert Figure 2 >>> One reason is the increased domestic competition between major integrated steel makers with blast furnaces and relatively smaller steel makers with electric furnaces. According to Itami and Itami’s Office (1997), steel makers with electric furnaces has smaller scale with simple facilities, which allows them to produce steel products with less cost compared with major integrated steel makers. It was also suggested that it was easier for steel makers with electric furnaces to enter into the steel markets because of less fixed costs compared with the existing major integrated makers (ibid.). Thus, the quantity share of crude steel produced with electric furnaces to the total production increased from 32 percent in 1980 to 44-50 percent in the 1990s.5 Furthermore, domestic competition among major steel makers is also expected to be another reason of the recent fall in the steel prices in Japan. Japan’s major users of steel products purchased those products dispersedly from several major steel makers shown in Table 4 (Itami and Itami’s Office, 1997). Because of this type of market structure, Ministry of Economy, Trade and Industry (2001) indicated that the bargaining power of the major steel users was relatively strong in Japan.6

<<< Insert Table 4 >>> 3. The Data Turning to the data used in this paper, price-cost margin in Japan’s iron and steel industry is analyzed with four kinds of database, namely, (1) Input-Output Tables,

3 It will be called the five major steel makers afterward, including Nippon Steel, NKK, Kawasaki Steel, Sumitomo Metal Industries, and Kobe Steel. 4 Those shares are measured with the data for the five major steel makers from the Committee for Iron and Steel Statistics (various years) divided by the aggregated data in the iron and steel industry in Financial Statement Statistics of Corporations from Ministry of Finance (several issues). 5 See Ministry of International Trade and Industry (MITI, several issues, c). 6 These low prices of steel products is causing great concerns in Japan’s iron and steel industry, and there is an opinion that the consolidation of Kawasaki Steel and NKK is expected to raise bargaining power of steel makers.

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(2) Census of Manufactures, (3) Financial Statement Statistics of Corporations, and (4) the summary financial reports of the five major steel makers (Nippon Steel, NKK, Kawasaki Steel, Sumitomo Metal Industries, and Kobe Steel). First, Input-Output Tables are annual databases published by Ministry of Economy, Trade and Industry (several issues, a), which are estimated on the basis of Input-Output Tables published by the Management and Coordination Agency every five years. This data provides consistent data for domestic demand and exports. However, its weak point is they are estimates, rather than census. Second, Census of Manufactures published by Ministry of Economy, Trade and Industry (several issues, b), in turn, is an aggregated data of census for establishments. Third, Financial Statement Statistics of Corporations is an aggregate financial data, compiled by the Ministry of Finance. And finally, we use the summary of financial reports for the five major steel makers in Handbook for Iron and Steel Statistics compiled by Committee on Iron and Steel Statistics (several issues). The third database is convenient to contrast the performance of the five major steel makers in the fourth database with the whole Japan’s iron and steel industry.

Table 5 summarizes the performance of Japan’s iron and steel industry in 1999 with breakdown of those databases, and makes comparison with other official data. Three major points are notable. First, value added of Input-Output Tables and Census of Manufactures cover more than 90 percent of the one published by national accounts (Annual Report on National Statistics). Exports in Input-Output Tables also cover 90 percent of the one in the Summary Report on Trade of Japan (Japan Tariff Association, several issues). Second, the ratio of intermediate materials to output is 58 percent with Census of Manufactures, which is lower than 73-78 percent with other databases. Similarly, the ratio of compensation of employees to value added is 32 percent with Census of Manufactures, and also is lower than 47-50 percent with other databases. This difference is because the Census of Manufactures counts intermediate materials and compensation only in production process, whereas other three databases include them not only in production process, but also non-production process, such as sales management costs. Third, from this table, the five major steel makers account for 40 percent of total sales and 35 percent of value added in Japan’s iron and steel industry.

<<< Insert Table 5 >>> Japan’s iron and steel industry had already started to make efforts to cut down costs since the oil shock in 1972, mainly by improvements in production process and energy-saving technologies. And after the strong yen in 1985, the industry implemented additional cost reductions by means of labor cuts and disposals of excessive facilities and equipments. Figure 3-1 shows that the ratio of intermediate

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materials to total sales for Japan’s iron and steel industry decreased sharply before and after 1985. Figure 3-2 also shows the ratio of compensation to total sales. There seem no trends in spite of fluctuations since the mid 1980s. When wage rate was increasing during the period, Japan’s iron and steel industry kept labor cost share constant by a personnel reduction7. As already shown in Table 1, the number of employees in the industry decreased by 35 percent in the 1990s. And since the late 1990s, further restructuring has been carried on, and the ratio of compensation to total sales tend to decrease, especially with the five major steel makers (Figure 3-2).

<<< Insert Figure 3-1 and 3-2 >>> 4. Price-cost Margin in Japan’s Iron and Steel Industry Price-cost Margin in Japan’s Iron and Steel Industry

In this analysis, price-cost margin (PCM) is defined as follows,

WBMWBVAPCM

+−

≡ ,

where VA, M, and WB denote the amounts of value added, intermediate materials, and compensation of employees, respectively. It should be noted that the price-cost margin in this definition indicates price over average variable cost minus one, or in other word, profit rate per cost in monetary basis. 8 Using this definition, price-cost margins are calculated across industries in the Japanese manufacturing sector in 1990 and 1999. As shown in Figure 4, the price-cost margin in Japan’s iron and steel industry was 0.26 in 1990, which was not too high compared with other industries (the ninth smallest out of 13 industries), and it decreased sharply to 0.16 in 1999, becoming the twelfth smallest across industries9.

<<< Insert Figure 4 >>> Figure 5 shows trends of price-cost margins in Japan’s iron and steel industry during 1980-2000, which were from the four databases.10 The price-cost margins in the Census of Manufactures have two major peculiarities. First, they are 0.25 to 0.45, which is higher than in other databases (0.12 to 0.27). As mentioned above, this is because the data in the Census of Manufactures includes variable costs only under

7 See Itami and Itami’s Office (1997). 8 For an estimation of price-cost margin in Japan’s iron and steel industry defined as price over marginal cost (markup rate) minus one, see Matsuoka (2002). 9 The data is taken from Input-Output Tables published by Ministry of Economy, Trade and Industry (several issues, a). 10 Data of each database are deflated with wholesale price index of all commodities from Price Indexes Annual (Bank of Japan, several issues), which makes it possible to obtain effects of changes of prices in the iron and steel industry by removing general effects of changes of prices.

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production process, whereas other databases include variable costs under both production and non-production processes. Second, the price-cost margins for other three databases continued to decline in 1990s (after reaching to the peak levels at 0.23 to 0.27 in 1988), to the levels of 0.14 to 0.17 in 1999, reflecting the following recession. On the other hand, the price-cost margin in Census of Manufactures also declined, but only slightly compared with other three databases (from 0.45 in 1988 to 0.40 in 1999). From this point of difference, there is a probability that a burden of variable costs under non-production process, not those under production process, may cause the decline of price-cost margin of Japan’s iron and steel industry in the 1990s. This point will be discussed later in the analysis of a decomposition of the growth rate of price-cost margins. However, there is a common feature for trends of the price-cost margins with those databases in Figure 5. The price-cost margins started to rise sharply from 1986, when the economic boom started after the recession caused by a strong yen, and reached to the peak in 1988. After the peaks, they continued to decline during 1990s, though its decline in Census of Manufactures was slow compared with other databases. That is, price-cost margin rises during prosperity and decreases during recession in Japan’s iron and steel industry. This tendency is consistent with the results of Odagiri (2001) and Nishimura, et al (1999), suggesting that the price-cost margin is procyclical in Japan.11

<<< Insert Figure 5 >>> Factor Decomposition of Price-cost Margin From the definition mentioned above, the price-cost margin changes under the influences of both the changes of total sales coming from market conditions and the changes of variable costs. Thus, it is possible to investigate the causes of changes of the price-cost margin from 1980 to 1999 by decomposing into three factors as follows;

=∆PCMPCM WB

WBMWBVAWBMM

WBVAVA

∆⋅⎟⎟⎠

⎞⎜⎜⎝

⎛+

+−

−+∆

−−∆

)(1

)(1

)()(,

where X∆ indicates a first difference of variable X. The first term of the decomposition formula denotes the value added factor, the second term is the intermediate materials factor, and the third term is the labor factor.

11 Odagiri (2001) also suggests price-cost margin may decrease during a recession in industries with large fixed costs because of excessive competition of price cut. Furthermore, he suggested that the Japanese large companies try to keep output quantity by decreasing prices to secure their employment.

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As already discussed, the price-cost margin in Japan’s iron and steel industry rose during the economic boom and declined thereafter. Thus, it is important to compare the changes of the price-cost margin and their factor decompositions (value added factor, intermediate materials factor, and labor factor) between the 1980s and the 1990s. Table 6 shows period averages for the growth rates of the price-cost margin and each of the factor decompositions. Though they are calculated with four different databases, they have two common points. First, the growth rates of price-cost margin during 1981-1990 were positive about 0.6 to 6.8 percent per year in period average, however, they turned into negative (ranging from 0 to -3.2 percent) during 1991-1999. Second, the price-cost margins increased during 1981-1990, mainly due to the large positive contribution of value added, whereas, the intermediate materials factor and the labor factor had negative effects. However, the price-cost margins decreased during 1991-1999 because of the large negative contribution of value added, which exceeded the positive contribution of the intermediate materials factor and the labor factor. It is interesting to note the three points below when the decomposition results for growth rates of the price-cost margin are compared among those databases. First, the period average of the negative contribution of value added for the five major steel makers during 1991-1999 was relatively larger, with -9.3 percent than other databases. As already discussed in Figure 2, the share of value added for the five major steel makers to the total of the iron and steel industry declined since 1986. Thus, the large negative contribution of value added to the price-cost margin for the five major steel makers are related to their reduced market power. Second, in the five major steel makers, the positive contribution of labor during 1991-1999 was relatively larger with 5.2 percent points compared with other databases (0.7 to 1.8 percent points). The five major steel makers have been the first to reduce labor force since the 1980, and the total number of employee reduced from 169,000 in 1986, to 92,000 in 1995, and then to 61,000 in 2000 (Committee on Iron and Steel Statistics, several issues), and their ratio of compensation decreased rapidly (as shown in Figure 3-2).12 Such a restructuring of the production structure induced the positive effects on the price-cost margin. Third, the positive contribution of intermediate materials factor for Census of Manufactures during 1991-1999 was 3.4 percent points and larger than those for other three databases (1.3 to 2.6 percent points). As already pointed out in Figure 5, higher levels of the price-cost margin in Census of Manufactures compared with other databases was caused partly by an inclusion of intermediate materials costs in both production and

12 See also The Japan Steel and Iron Federation (1999).

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non-production process (such as sales management costs), in the other databases, whereas Census of Manufactures includes costs only in production process. Thus, it is possible that costs of non-production process is the one of the causes to reduce the price-cost margin in Japan’s iron and steel industry in the 1990s, though intermediate materials are used relatively efficiently in production process.

<<< Insert Table 6 >>>

Decomposition of Total Sales Factor decomposition of the price-cost margin in the previous section indicates that price-cost margin decreased much more in the 1990s than in the 1980s, mainly due to the large negative contribution of value added. As far as the contribution of intermediate materials and labor to the price-cost margin turned to be positive in the 1990s from the negative in the 1980s, the large negative contribution of value added is mainly caused by the decrease of total sales. As already shown in Figure 6, steel exports decreased sharply after 1985, which leaded to sharp decline of total sales. After that, total sales recovered during the economic boom in the late 1980s, and it decreased again in the following recession of the 1990s. However, exports remained stable after it decreased.

<<< Insert Figure 6 >>> Therefore, the growth rate of total sales (SL) is decomposed into four factors of

domestic steel price, domestic sales quantity, export steel price, and export quantity, as follows;

X

XX

X

XX

D

DD

D

DD Y

Ys

PP

sYY

sPP

sSLSL ∆

⋅+∆⋅+

∆⋅+

∆⋅=

∆ ,

where, SL, PD, YD, PX, and YX denote total sales, domestic price, domestic sales quantity, export price, and export quantities, respectively, and Ds denotes the share of domestic sales to the total sales, and Xs as the share of exports to the total sales

( XDD

D sSL

YPs −=⋅

≡ 1 ). Each of the first two terms in the formula indicates the

contribution to the change of total sales of domestic prices, and domestic sales quantity, and the sum of these two factors interprets the domestic demand factor. Similarly, each of the third and forth term indicates the contribution to the change of total sales of export prices, and export quantity, with the sum of them interpreting the export factor. The growth rates of the domestic price and export price are taken from the domestic wholesale price index and export price index of iron and steel industry (Bank of Japan, several issues). The growth rate of domestic sales quantity (or export

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quantity) is obtained by subtracting the growth rate of domestic price (or export price) from the growth rate of domestic sales value (or export value) taken from Input-Output Table Ministry of Economy, Trade and Industry (several issues). Input-Output Table is used to decompose total sales because it contains consistent data of domestic demand and exports.13

According to the decomposition method, Table 7 shows results of decomposition for the growth rates of total sales in period average of the 1980s and the 1990s in Japan’s iron and steel industry. During 1981-1990, the growth rate of total sales in period average is 0.79 percent per year with the domestic demand factor as 1.18 percent points and the export factor as -0.38 percent points. This indicates that the positive domestic demand factor in period average exceeded the negative export factor, contributing to increase total sales. After 1985, a strong yen reduced exports, and triggered a short-term recession, but the economy started to recover due to the economic stimulus policy, leading to the economic boom from the late 1980s to the early 1990s. In addition, total sales grew in 1980s mainly due to the positive contribution of the domestic demand quantity (1.24 percent point in period average). Furthermore, the negative contribution of exports was almost the same magnitude between export price factor and export quantity factor (-0.18 percent points and -0.20 percent points, respectively). On the other hand, during 1991-1999, the growth rate of total sales in period average is -2.46 percent, due to the negative contribution of both domestic demand and exports factors (-2.33 percent points and -0.13 percent points, respectively). However, the negative contribution of the domestic demand was very large, reflecting the ongoing recession.

Compared with the 1980s, the first to remark is that the negative contribution of domestic prices became the most major cause of the negative growth of total sales in 1990s, with -1.49 percent points. Second, exports had negative contribution to the growth of total sales during both the 1980s and the 1990s. With a detailed decomposition, however, the export quantity factor turned to contribute positively to the change of total sales with 0.17 percent points during 1991-1999 from -0.2 percent points during 1981-1990. The export price factor remained negative during the two periods. However, it must be noted that negative domestic demand factor, especially the domestic price factor, causes the large part of the reduction of total sales in 1990s.

<<< Insert Table 7 >>>

13 Domestic demand in this analysis is calculated by subtracting export value from total sales value.

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5. Price-cost Margin in Japan’s Iron and Steel Sub-industry So far the study of price-cost margin in Japan’s iron and steel industry was based on the aggregated classification with several databases. This section expands the analysis into the iron and steel sub-industry with disaggregated classification, using Input-Output Table by Ministry of Economy, Trade and Industry (several issues, a), because Census of Manufactures, another candidate, uses a unique industrial classification to the iron and steel industry in accordance with manufacturing process or facilities.14 Those sub-industries in this analysis are pig iron and crude steel, hot rolled steel, steel pipes and tubes, and cold rolled and coated steel. Table 8 shows the performance of these sub-industries in 1980, 1990, and 1999. The industry share of value added for pig iron, hot rolled steel, and cold rolled and coated steel have been between 20 to 24 percent, except for hot rolled steel in 1990 due to the economic boom. The share of value added for steel pipes decreased from 11 percent in 1980 to about 5 percent in the 1990s, corresponding to the decline of the industry share of export from 28 percent in 1980 to 16 percent in 1999. The industry shares of exports are large in hot rolled steel and cold rolled steel, and its share for steel and pipes declined, as its export ratio to total sales decreased.

<<< Insert Table 8 >>> Price-cost Margin in the Iron and Steel Sub-industry Similar with Figure 5, Figure 7 shows trends of price-cost margins in the iron and steel sub-industry calculated during 1980-1999.15 Price-cost margin of pig iron and crude steel increased from the level of 0.1 in the early 1980s to 0.24 in 1987 when the economic boom started, then after it, it kept about 0.2 before decreasing a little after 1998. Price-cost margin of hot rolled steel also increased sharply from less than about 0.1 in the early 1980s to more than 0.25 during the economic boom, however it decreased to about 0.15 the 1990s. On the other hand, the price-cost margin of steel pipes and tubes, which had the highest export ratio to total sales among these sub-industries (Table 8), kept about 0.20 to 0.25 before falling to 0.15 since 1996. The price-cost margin of cold rolled and coated steel was the highest among them in the

14 Census of Manufactures published by Ministry of Economy, Trade and Industry (several issues, b) also releases the data with a disaggregated industrial classification in accordance with Japan Standard Industrial Classification, except iron and steel industry. They adopts a unique disaggregated industrial classification to iron and steel industry in accordance with manufacturing process or facilities, for instance, “steel industry with blast furnaces,” “steel industry without blast furnaces,” “steel mills,” “steel makers without steel mills,” and so on. 15 Similar with Figure 5, data are deflated with overall wholesale price index of all commodities to remove the overall effect of the deflation.

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1980s, however it tended to decrease since the early 1980s before increasing since 1996. <<< Insert Figure 7 >>>

Factor Decomposition of Price-cost Margin in the Iron and Steel Sub-industry Similar with a methodology of the decomposition of the growth rate of price-cost margin in Table 6 with aggregated classification of the iron and steel industry, the growth rates of the price-cost margin in the iron and steel sub-industry are decomposed into the value added factor, the intermediate materials factor, and the labor factor. Table 9 shows the decomposition results of the price-cost margin in each of sub-industry from 1981-1990 and 1991-1999. They were similar to the results with the more aggregated classification shown in Table 6. The growth rates of price-cost margin during 1981 to 1990 were positive, ranging from 0.0 to 15.3 percent per year in period average, mainly due to the large positive contribution of value added (6.7 to 19.6 percent points), except steel pipes and tubes. However, they turned to be negative about -1.3 to -3.7 percent points during 1991-1999, because of the large negative contribution of value added (-2.7 to -12.2 percent points). The effects of the intermediate materials factor and the labor factor to the price-cost margin vary across sub-industries in 1981-1990, however, they tend to have positive contribution in 1991-1999.

<<< Insert Table 9 >>> Decomposition of Total Sales in the Iron and Steel Sub-industry The previous results in the sub-industries shows again that the major cause to reduce price-cost margins in the 1990s was a decrease of value added. Therefore, we decompose the total sales in each of sub-industry into four factors of domestic price, domestic sales quantity, export price, and export quantity with the similar methodology described in the previous section, and the results are shown in Table 10. During 1981 to 1990, growth rate of total sales varied from -0.19 to 2.4 percent per year, however, domestic demand factors had positive effect to increase total sales (1.6 to 2.8 percent points), reflecting the economic boom, except pig iron and crude steel. And export factors had negative effects with -0.4 to -2.3 percent points, because of the strong yen. Then negative effect of export factors was especially large in steel pipes and tubes, which export ratio to the total sales was the highest.

Compared with the 1980s, total sales decreased during 1991 to 1999 mainly due to the decline of the domestic price factor in all of the iron and steel sub-industries. The export price factors were all negative and the export quantity factors were positive,

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however, their contributions were very small compared with the domestic factors. Similar with the results with more aggregated classification of the iron and steel industry, the fall of domestic steel prices in each of sub-industry was the major cause of reduced total sales during 1990s.

<<< Insert Table 10 >>> 6. Conclusion

The purpose of this paper is to investigate the sources of the profitability changes in Japan’s iron and steel industry, by decomposing the price-cost margin into value added factor, intermediate materials factor, and labor factor during 1980 to1999.

The first major finding is that price-cost margins in Japan’s iron and steel industry increased in the 1980s mainly due to the positive contribution of value added, and decreased in the 1990s mainly due to its negative contribution. This tendency was observed in a large industrial classification with several databases. The large negative contributions of value added in the 1990s are also observed in the iron and steel sub-industries with more disaggregated classification. It also should be noted that this negative effect was larger with the five major steel makers (Nippon Steel, NKK, Kawasaki Steel, Sumitomo Metal Industries, and Kobe Steel), which was accompanied with a decline of their value added share in Japan’s iron and steel industry. The second, when the growth rate of total sales were decomposed into the factors of domestic price, domestic quantity, export price, and export quantity, the decrease of domestic price factor was the major cause to reduce total sales in the 1990s. The decrease of export price factor also reduced total sales, whereas export quantity factor increased total sales. However, those export factors were very small compared with the negative domestic price factor. Considering those findings and the fall of domestic steel prices in the 1990s, Japan’s iron and steel industry might have less market power with more competitive product markets than expected.

This paper also compares the decomposition of the growth rate of price-cost margin with several databases. In Census of Manufactures, the decline of the price-cost margin in the 1990s was slow as compared with other databases, and also the positive contribution of intermediate materials was larger than in other databases. When it is considered that costs of intermediate materials in Census of Manufactures don’t include non-production process, this may suggest that costs of intermediate materials under non-production process (such as sales management costs), increase variable costs and lead to decreased profitability, whereas variable costs under production process are used more efficiently.

15

This analysis focuses on examining recent trends of price-cost margin and the effect of overall market power changes and cost structural changes, and tries to find the facts in Japan’s iron and steel industry through its factor decomposition. However, there are several tasks to be considered. First, this paper finds that price-cost margin in the 1990s declined mainly due to the reduced value added, which is related with the fall of domestic steel prices. This may be due to the recession in 1990s, as former literature on Japan’s case suggests that the price-cost margins tend to be procyclical. This should be investigated, as well as the hypothesis of price setting strategies for Japan’s steel makers. In addition the, analysis with the firm-level data is also required. The second, it is interesting to analyze the relationship between the price-cost margin and exports by Japanese producers to verify the recent allegations about the dumping of steel products.

16

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Bank of Japan (several issues), Price Indexes Annual, several years.

Committee on Iron and Steel Statistics (several issues), Handbook for Iron and Steel Statistics,

several issues.

Economic Planning Agency (2000), Annual Report on National Accounts, 2000, CD-ROM.

Itami, H. and Itami’s Office (1997), Nihon no Tekkogyo:Naze Ima mo Sekaiichi Nanoka (Japanese

Iron and Steel industry), NTT Printings.

Japan Tariff Association (several issues), The Summary Report on Trade of Japan.

Kitasaka, S. (1992), “Estimation of the Dynamic Factor Demand System in the Japanese Iron and

Steel Industry (Dougaku-teki Seisan Youso Juyou Sisutemu no Suikei-Wagakuni

Tekkougyou no Baai),” The Economic Studies Quarterly, Vol.43, No.2, pp176-

Nishimura, K. G., Y. Ohkusa, and K. Ariga (1999), “Estimating the mark-up over marginal cost: a

panel analysis of Japanese firms 1971-1994,” International Journal of Industrial

Organization, Vol.17, pp.1077-1111.

Matsuoka, A (2002), “Price-Cost Margins for Export and Domestic Markets: A Case for the Japan’s

Iron and Steel Industry,” Working Paper Series Vol. 2002-33, Kitakyushu: The

International Center for the Study of East Asian Economic Development.

Ministry of Economy, Trade and Industry (METI, several issues, a), Input-Output Tables, several issues.

Ministry of Economy, Trade and Industry (METI, several issues, b), Census of Manufacture Report by Industry, several issues.

Ministry of Economy, Trade and Industry (2001), Tekkogyou no Kyousouryoku Kyouka to Shorai Tembou Kenkyuukai Chuukan Houkoku (An interim report of the study group for competitive power and perspectives in the iron and steel Industry), December 2001, http://www.meti.go.jp/report/data/g11213aj.html

Ministry of Finance (several issues), “Financial Statements Statistics of Corporations” in Ministry of Finance Statistics Monthly, several issues, Policy Research Institute in Ministry of Finance.

Ministry of International Trade and Industry (MITI, several issues,c), Yearbook of Iron and Steel

Statistics Ministry of Labor (2000), Yearbook of Labour Statistics, 1999. Odagiri, M. (2001odagiri), Atarashii Sangyo Soshiki Ron: Riron, Jissho, Seisaku (Modern Industrial

Organization: Theoretical and Empirical Approaches and Competition Policy),

Yuhikaku. Odagiri, H. and T. Yamashita (1987), “Price Mark-ups, Market Structure, and Business Fluctuation

in Japanese Manufacturing Industries,” Journal of Industrial Economics, Vol.35, No.3,

17

pp.317-331.

Shirai, M. (2000), “Measurement of Sectorial Technological Progress, (Sangyou betsu Gijutsu

Shinpo no Keisoku-Fukanzen Kyousou oyobi Tanki Kotei Hiyou wo Kouryo sita Baai)”

JCER Economic Journal, No.41, September 2000, pp.28-44.

The Japan Steel and Iron Federation (1999), Tekkou Juunen shi 1988-1997(History of Steel and Iron

industry 1988-1997), The Japan Steel and Iron Federation.

Table 1: Basic Indicators for Japan's Steel Industry

Indicator1990-1992

1993-1996 1997 1998 1999 2000 2001

Gross Output Billion current US$ 116.682 121.115 107.711 87.548 88.019 #N/A #N/A Trillion current yen 15.783 12.561 13.032 11.461 10.026 #N/A #N/A Trillion 1995 yen 13.859 12.443 12.865 11.647 10.863 #N/A #N/A

Value Added Billion US$ 53.218 57.902 50.561 37.549 41.421 48.851 #N/A Trillion current yen 7.181 6.002 6.117 4.916 4.718 5.265 #N/A - % of GDP 1.55 1.21 1.17 0.95 0.92 1.03 #N/A Trillion 1995 yen 6.350 5.970 6.277 5.063 5.068 5.792 #N/A - % of GDP 1.34 1.20 1.20 0.98 0.97 1.08 #N/A

Employment Number 305,000 261,000 230,000 226,000 208,000 197,000 #N/A - % of total 1.29 1.11 0.99 0.97 0.82 0.79 #N/A

Value Added/Employee Current US$ 174,497 222,836 219,831 166,148 199,141 247,976 #N/A Thousand current yen 23,544 23,070 26,597 21,750 22,684 26,724 #N/A Thousand 1995 yen 20,820 22,992 27,291 22,403 24,367 29,399 #N/A

Compensation/Employee Current US$ 44,826 62,536 56,719 50,585 59,627 #N/A #N/A Thousand current yen 6,046 6,477 6,862 6,622 6,792 #N/A #N/A

Shares of Value Added in Percent Wages & salaries 26.39 30.86 28.47 29.70 31.71 #N/A #N/A Depreciation 13.09 16.10 15.19 16.22 16.90 #N/A #N/A Other operating surplus 60.52 53.05 56.33 54.09 51.39 #N/A #N/A

Exports (value from Stats Canada, quantity from OECD) Billion current US$ 13.608 15.838 16.446 15.493 14.178 15.792 #N/A - % of Gross Output 11.66 13.08 15.27 17.70 16.11 #N/A #N/A Quantity 1995=100 notyet 97.969 102.410 120.871 123.402 127.469 133.360 Implicit Price 1995=100 notyet 93.304 90.585 72.304 64.808 69.885 #N/A

Imports (value from Stats Canada, quantity from OECD) Billion current US$ 4.339 4.487 4.239 2.981 3.043 3.728 #N/A - % of Gross Output 3.72 3.70 3.94 3.41 3.46 #N/A #N/A Quantity 1995=100 97.869 83.719 81.592 56.536 54.971 65.805 51.561 Implicit Price 1995=100 77.304 96.890 89.946 91.300 95.846 98.101 #N/A

Sources: METI (several issues,b); Ministry of Labor (several issues); Bank of Japan (several issues); OECD (2001, 2002); Statistics Canada (2002); International Monetary Fund (2002).

18

Table 2: The Value of Japan's Steel Exports by Commodity and Destination (US$ millions)

Indicator1990-1992

1993-1996 1997 1998 1999 2000 2001

All Steel (SITC 67) 13,608 15,838 16,446 15,493 14,178 15,792 #N/A Asia 9,301 12,086 12,363 9,490 10,528 12,186 #N/A China 1,388 2,425 1,955 1,621 1,882 2,445 #N/A Korea 1,410 1,886 2,115 1,235 1,980 2,657 #N/A Taiwan 1,450 1,720 1,611 1,473 1,413 1,458 #N/A Europe 676 646 680 923 604 542 #N/A North America 2,388 1,907 2,086 3,724 1,914 1,753 #N/A U.S.A. 2,218 1,751 1,922 3,387 1,699 1,483 #N/A

Pig iron, sponge iron, etc. (SITC 671) 63 219 259 434 402 369 #N/A Asia 41 172 205 326 348 321 #N/A China 2 6 8 8 19 22 #N/A Korea 18 71 89 166 170 123 #N/A Taiwan 9 62 79 104 122 148 #N/A Europe 5 6 21 6 8 16 #N/A North America 16 37 27 87 40 29 #N/A U.S.A. 16 37 27 87 40 29 #N/A

Ingots, primary forms, etc. (SITC 672) 54 236 171 268 408 358 #N/A Asia 52 131 148 200 260 240 #N/A China 7 9 5 12 38 40 #N/A Korea 12 65 97 34 84 108 #N/A Taiwan 28 52 33 117 90 47 #N/A Europe 1 1 1 19 51 37 #N/A North America 2 104 22 48 97 81 #N/A U.S.A. 2 103 22 48 82 81 #N/A

Bars, rods, angles, shapes (SITC 673) 1,516 1,897 1,904 1,926 1,566 1,668 #N/A Asia 1,114 1,521 1,486 1,106 1,142 1,267 #N/A China 70 247 168 170 134 120 #N/A Korea 209 303 357 191 303 350 #N/A Taiwan 354 341 274 229 176 187 #N/A Europe 58 64 67 78 52 57 #N/A North America 288 263 299 671 320 303 #N/A U.S.A. 264 245 282 637 295 242 #N/A

Universals, plates, sheets (SITC 674) 8,043 9,772 10,244 9,021 8,747 10,575 #N/A Asia 5,856 8,115 8,358 5,962 6,998 8,762 #N/A China 812 1,670 1,444 1,030 1,398 1,968 #N/A Korea 936 1,151 1,308 699 1,242 1,847 #N/A Taiwan 878 1,060 998 819 845 890 #N/A Europe 217 196 156 238 213 225 #N/A North America 1,395 877 1,013 1,934 792 597 #N/A U.S.A. 1,326 803 957 1,771 697 491 #N/A

Tubes, pipes, fittings (SITC 678) 3,507 3,168 3,315 3,324 2,528 2,248 #N/A Asia 2,053 1,870 1,895 1,691 1,522 1,313 #N/A China 484 442 292 364 240 230 #N/A Korea 203 247 218 126 148 190 #N/A Taiwan 142 156 171 162 132 141 #N/A Europe 372 352 408 550 244 170 #N/A North America 532 452 496 727 456 518 #N/A U.S.A. 475 404 441 623 398 436 #N/ASource: Statistics Canada (2002).

19

Table 3: The Value of Japan's Steel Imports by Commodity and Source (US$ millions)

Indicator1990-1992

1993-1996 1997 1998 1999 2000 2001

All Steel (SITC 67) 4,339 4,487 4,239 2,981 3,043 3,728 #N/A Asia 2,507 2,926 3,030 2,253 2,104 2,699 #N/A China 341 648 819 592 477 763 #N/A Korea 1,495 1,557 1,521 1,155 1,101 1,291 #N/A Taiwan 347 408 458 356 372 438 #N/A Europe 455 357 266 193 165 208 #N/A North America 235 168 161 133 130 193 #N/A U.S.A. 222 163 153 127 125 185 #N/A

Pig iron, sponge iron, etc. (SITC 671) 1,193 1,288 1,146 725 882 1,136 #N/A Asia 297 503 470 293 255 460 #N/A China 203 403 382 240 213 389 #N/A Korea 1 2 14 10 5 11 #N/A Taiwan 1 0 0 1 1 0 #N/A Europe 159 102 58 43 32 37 #N/A North America 30 46 78 62 62 69 #N/A U.S.A. 26 44 73 59 60 64 #N/A

Ingots, primary forms, etc. (SITC 672) 227 201 139 69 81 64 #N/A Asia 104 109 111 57 29 52 #N/A China 6 35 54 50 28 49 #N/A Korea 44 38 57 5 1 2 #N/A Taiwan 4 26 0 0 0 0 #N/A Europe 21 20 13 7 5 8 #N/A North America 22 4 6 5 5 1 #N/A U.S.A. 15 4 6 5 5 1 #N/A

Bars, rods, angles, shapes (SITC 673) 343 221 128 94 89 107 #N/A Asia 205 154 89 67 70 81 #N/A China 21 9 5 2 1 3 #N/A Korea 139 100 60 53 54 61 #N/A Taiwan 6 3 4 4 8 7 #N/A Europe 57 26 29 18 11 15 #N/A North America 16 11 9 8 7 11 #N/A U.S.A. 16 9 8 7 6 9 #N/A

Universals, plates, sheets (SITC 674) 2,093 2,124 2,054 1,442 1,382 1,658 #N/A Asia 1,509 1,648 1,728 1,305 1,244 1,507 #N/A China 69 92 164 103 77 128 #N/A Korea 1,064 1,164 1,135 882 830 983 #N/A Taiwan 278 316 389 303 317 371 #N/A Europe 180 136 89 56 65 84 #N/A North America 120 46 13 11 10 18 #N/A U.S.A. 119 46 12 10 10 17 #N/A

Tubes, pipes, fittings (SITC 678) 303 355 372 298 281 400 #N/A Asia 242 267 292 228 222 287 #N/A China 22 35 56 55 46 69 #N/A Korea 152 131 117 80 82 99 #N/A Taiwan 32 31 36 28 24 34 #N/A Europe 22 40 48 34 22 33 #N/A North America 38 47 31 35 36 78 #N/A U.S.A. 38 47 31 35 35 78 #N/ASource: Statistics Canada (2002).

20

Figure 1: Japan's whole sales price index of all commodities, and iron and steel (1980=100)

Source: Bank of Japan (several issues)

70

75

80

85

90

95

100

105

198019811982198319841985198619871988198919901991199219931994199519961997199819992000

Overall wholesale price index, all commodities Overall wholesale price index, Iron and steel

21

Figure 2: The share of the five major steel makers in Japan's iron and steel industry

Source: Committee on Iron and Steel Statistics (several issues), and Ministry of Finance (several issues)Note: The five major steel makers include Nippon Steel, NKK, Kawasaki Steel, Sumitomo Metal Industries, and Kobe Steel.

30

35

40

45

50

55

60

1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

Share of total sales (%) Share of value added (%) Share of variable cost (%)

22

Table 4: Shares of steel products purchased by major Japanese users from major steel makers(%)

Toyota MotorCorp.

Nissan MotorCo., Ltd

MitsubishiMotors Corp.

MatsushitaElectricIndustrial Co.,Ltd.

MitsubishiElectric Corp.

MitsubishiHeavyIndustries,Ltd.*

Hitachi ZosenCorp.*

Nippon Steel Corp. 40 31 36 56 40 38 47NKK Corp. 23 22 10 6 22 14 -**Kawasaki Steel Corp. 5 23 40 7 11 20 27Sumitomo Metal Industries, Ltd. 15 15 4 21 21 11 22Kobe Steel, Ltd. 10 8 3 4 2 17 4Nisshin Steel Co., Ltd. 7 1 7 4 1 - -Others - - - 2 3 - -Purchased Quantity(Monthly average, ton) 280,000 105,000 84,000 2,700 12,000 23,100 14,600Source: Table 6-5 in Itami and Itami's Office (1997)Note: Data with "*" are in 1992, otherwise in the second half of 1992. "-**" means negligible.

23

Table 5: Major performances of Japan's iron and steel industry with several databases in 1999(Million of yen)

Input-OutputTables

Census ofManufactures

FinancialStatementsStatistics of

Corporations

The five majorsteel makers

B/A(%)

AnnualReport onNationalStatistics

TheSummaryReport onTrade of

Japan

Year Book ofLabor Statistics

(A) (B)

Total sales (or output)* 16,288,675 10,026,219 13,295,527 5,314,900 40.0 --- --- ---

Value added 4,361,188 4,200,522 3,510,865 1,238,372 35.3 4,718,300 --- ---

Intermediate materials 11,927,487 5,768,648 9,784,662 4,076,528 41.7 --- --- ---

Compensation 2,111,029 1,331,910 1,647,192 611,214 37.1 --- --- ---

Exports 1,415,592 --- --- --- --- --- 1,533,471 ---

Number of employees(persons) --- 196,097 277,840 61,792 22.2 208,000

Ratio of intermediate materialsto total sales (%) 73.2 57.5 73.6 76.7 --- --- --- ---

Ratio of compensation to valueadded (%) 48.4 31.7 46.9 49.4 --- --- --- ---

Source (a) (b) (c) (d) (e) (f) (g)Source: Author's calculation from several databases as follows; (a) Ministry of Economy, Trade and Industry (several issues,a), (b) Ministry of Economy, Trade and Industry (several issues,b), (c) Ministry of Finance (several issues), (d) The data of the five major steel makers are referred as Handbook for Iron and Steel Statistics by Committee on Iron and Steel Statistics (several issues). (e) Economic Planning Agency (2000), (f) Japan Tariff Association (several issues), (g) Ministry of Labor (2000).Note: * indicates output rather than total sales for Input-Output Tables and Census of Manufactures.

24

Figure 3-1: The ratio of intermediate materials to total sales (%)

Figure 3-2: The ratio of compensation to total sales (%)

Source: The same with source (a) to (d) in Table 5.

50

55

60

65

70

75

80

85

1980198119821983198419851986198719881989199019911992199319941995199619971998199920002001

Input-Output Tables Census of ManufacturesFinancial Statements Statistics of Corporations The five major steel makers

6

8

10

12

14

16

18

20

1980198119821983198419851986198719881989199019911992199319941995199619971998199920002001

Input-Output Tables Census of ManufacturesFinancial Statements Statistics of Corporations The five major steel makers

25

Figure 4: Price cost margins of Japan's major industries in 1990 and 1999

Source: Author's calculation from Input-Output Tables by Ministry of Economy, Trade and Industry (several issues,a).Note: Price-cost margin (PCM) is calculated as PCM = (VA - WB) / (M + WB), where VA, WB, and M denote value added, compensation, and intermediate materials.

0.89

0.0

0.1

0.2

0.3

0.4

0.5

0.6

Manufacturing

Food

Textile products

Wood products, pulp, paper

Chemical products

Petroleum and coal products

Ceramic, stone and clay products

Iron and steel

Non-ferrous metals

Metal products

General machinery

Electrical machinery

Motor vehicles

1990 1999

26

Figure 5: Price-cost margins of Japan's iron and steel industry with several databases

Source: Author's calculation from source (a) to (d) in Table 5.

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

0.50

198019811982198319841985198619871988198919901991199219931994199519961997199819992000

Input-Output Tables

Census of Manufactures

Financial Statements Statistics of Corporations

The five major steel makers

27

Table 6: Decomposition of the growth of price-cost margins in Japan's iron and steel industry with several databases

(Period average, %)1981-1990* 1991-1999

Input-Output TablesGrowth rate of Price-cost margin 6.8 -3.2

Value added 8.2 -7.3Intermediate materials -0.5 2.6Labor -0.8 1.5

Census of ManufacturesGrowth rate of Price-cost margin 3.5 0.0

Value added 5.6 -4.1Intermediate materials -0.9 3.4Labor -1.3 0.7

Financial Statements Statistics of Corporations Growth rate of Price-cost margin 2.5 -2.4

Value added 7.0 -5.5Intermediate materials -2.8 1.3Labor -1.6 1.8

The five major steel makersGrowth rate of Price-cost margin 0.6 -2.8

Value added 6.2 -9.3Intermediate materials -6.3 1.3Labor 0.7 5.2

Source: Author's calculation from source (a) to (d) in Table 5.Note: Period of the data for the five major steel makers in "*" is 1986-1990.

28

Figure 6: Total sales, exort share to total sales, and exports in Japan's iron and steel industry

Source: Ministry of Economy,Trade and Industry (several issues,a).

Source: Japan Tariff Association (several issues).

Total sales and export share to total sales

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

19801981198219831984198519861987198819891990199119921993199419951996199719981999

0

2

4

6

8

10

12

14

16

(%)

Total sales (Bil. of Yen) Export share to total sales (%)

Exports

05001,0001,5002,0002,5003,0003,5004,0004,500

19801981198219831984198519861987198819891990199119921993199419951996199719981999

Exports (Bil. of Yen)

29

Table 7: Decomposition of the growth of total sales in Japan's iron and steel industry(Period average, %)

1981-1990 1991-1999

Growth rate of total sales 0.8 -2.5Domestic demand 1.2 -2.3

Price -0.1 -1.5Quantity 1.2 -0.8

Export -0.4 -0.1Price -0.2 -0.3Quantity -0.2 0.2

Source: Author's calculation from Ministry of Economy,Trade and Industry (several issues,a).

30

Table 8: Performances in Japan's iron and steel sub-industries1980 1990 1999

Industryshare (%)

Industryshare (%)

Industryshare (%)

Value added (million yen)Iron and steel 5,077,359 100.0 7,232,563 100.0 4,894,774 100.0Pig iron and crude steel 1,182,369 23.3 1,503,327 20.8 1,159,915 23.7Hot rolled steel 1,161,335 22.9 2,120,096 29.3 992,861 20.3Steel pipes and tubes 574,473 11.3 461,905 6.4 256,229 5.2Cold rolled and coated steel 1,031,213 20.3 1,429,261 19.8 1,115,658 22.8Others 1,127,969 22.2 1,717,974 23.8 1,370,111 28.0

Intermediate materials (million yen)Iron and steel 21,469,735 100.0 18,773,487 100.0 13,386,799 100.0Pig iron and crude steel 8,064,647 37.6 5,053,487 26.9 3,882,774 29.0Hot rolled steel 6,439,864 30.0 5,656,291 30.1 3,938,341 29.4Steel pipes and tubes 1,426,147 6.6 1,094,220 5.8 607,022 4.5Cold rolled and coated steel 3,206,311 14.9 3,639,654 19.4 2,775,661 20.7Others 2,332,767 10.9 3,329,835 17.7 2,183,001 16.3

Compensation (million yen)Iron and steel 2,132,953 100.0 2,506,434 100.0 2,369,311 100.0Pig iron and crude steel 460,988 21.6 391,327 15.6 402,346 17.0Hot rolled steel 450,874 21.1 490,529 19.6 486,352 20.5Steel pipes and tubes 184,111 8.6 183,259 7.3 144,551 6.1Cold rolled and coated steel 389,890 18.3 449,143 17.9 488,597 20.6Others 647,089 30.3 992,176 39.6 847,465 35.8

Exports (million yen)Iron and steel 3,022,254 100.0 1,719,698 100.0 1,589,380 100.0Pig iron and crude steel 32,864 1.1 15,109 0.9 75,416 4.7Hot rolled steel 1,122,876 37.2 541,666 31.5 621,319 39.1Steel pipes and tubes 856,113 28.3 397,174 23.1 252,591 15.9Cold rolled and coated steel 979,985 32.4 740,007 43.0 623,466 39.2Others 30,417 1.0 25,742 1.5 16,588 1.0

Export ratio to total sales (%)Iron and steel 11.4 --- 6.6 --- 8.7 ---Pig iron and crude steel 0.4 --- 0.2 --- 1.5 ---Hot rolled steel 14.8 --- 7.0 --- 12.6 ---Steel pipes and tubes 42.8 --- 25.5 --- 29.3 ---Cold rolled and coated steel 23.1 --- 14.6 --- 16.0 ---Others 1.6 --- 1.0 --- 0.9 ---

Source: Ministry of Economy, Trade and Industry (several issues,a)Note: Those data are in real basis with overall wholesale price index by Bank of Japan (several issues).

31

Figure 7: Price-cost margins in Japan's iron and steel sub-industries

Source: Author's calculation from Ministry of Economy, Trade and Industry (several issues,a)

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Iron and steel Pig iron and crude steel Hot rolled steel

Steel pipes and tubes Cold rolled and coated steel

32

Table 9: Decomposition of the growth of price-cost margins in Japan's iron and steel sub-industries

(Period average, %)1981-1990* 1991-1999

Pig iron and crude steelGrowth rate of price-cost margin 11.9 -1.3

Value added 6.7 -2.7Intermediate materials 3.8 1.9Labor 1.4 -0.5

Hot rolled steelGrowth rate of Price-cost margin 15.3 -2.7

Value added 19.6 -8.3Intermediate materials -2.2 5.2Labor -2.1 0.4

Steel pipes and tubesGrowth rate of price-cost margin 0.0 -3.7

Value added 0.0 -12.2Intermediate materials 0.2 5.0Labor -0.2 3.5

Cold rolled and coated steelGrowth rate of price-cost margin 6.8 -1.7

Value added 8.1 -4.1Intermediate materials 0.5 2.4Labor -1.8 0.0

Source: Author's calculation from Ministry of Economy, Trade and Industry (several issues,a).

33

Table 10: Decomposition of the growth of total sales in Japan's iron and steel sub-industries

(Period average, %)1981-1990 1991-1999

Pig iron and crude steelGrowth rate of total sales -1.9 -2.2

Domestic demand -1.9 -2.3Price -1.2 -3.0Quantity -0.7 0.7

Export 0.0 0.1Price 0.0 0.0Quantity 0.0 0.1

Hot rolled steelGrowth rate of total sales 1.8 -4.7

Domestic demand 2.6 -4.8Price 0.2 -4.1Quantity 2.4 -0.7

Export -0.8 0.1Price -0.4 -0.4Quantity -0.4 0.5

Steel pipes and tubesGrowth rate of total sales -0.7 -6.0

Domestic demand 1.6 -4.7Price -0.7 -2.6Quantity 2.2 -2.0

Export -2.3 -1.3Price -2.2 -1.5Quantity -0.1 0.2

Cold rolled and coated steelGrowth rate of total sales 2.4 -2.8

Domestic demand 2.8 -2.5Price 0.7 -3.1Quantity 2.1 0.7

Export -0.4 -0.3Price -0.4 -0.4Quantity 0.0 0.2

Source: Author's calculation from Ministry of Economy, Trade and Industry (several issues,a).

34